Tariff

Tariff. A tariff is a tax on imports.

Let’s say the world price of a good is WP, the domestic economy produces Qs of the good but Qd is demanded so Qd – Qs is imported. A tariff T is then placed on the good, domestic and foreign prices rise to WP + T, domestic supply rises to Qs*, domestic demand falls to Qd* and imports fall to Qd* – Qs*.

Consumer surplus falls by the red, green and blue regions. Producer surplus rises by the green region. Tax revenue rises by the red region. Overall there is a welfare loss equal to the blue regions. Some of the consumer surplus is transferred to producers (green region) and the government (red region), but a welfare loss remains (blue regions).